Brexit Bulletin: Deals or No Trade Deals

September 16, 2016

How will the UK’s rhetoric about new trade deals with the wider world translate into reality? Now is a crucial time to understand how these new trade deals will impact businesses that are based in, or trade with, the UK and an unparalleled opportunity to influence the shape of the UK’s trade for a generation. 

Within days of the UK’s decision to leave the European Union, the former UK Business Secretary, Sajid Javid, was in India holding what he described as “preliminary trade talks”. Philip Hammond, the new Chancellor, was described as starting discussions with China on a new ambitious free trade agreement. And the head of the new Department for International Trade, Liam Fox, has also been talking to a lot of different countries about the possibility of new trade deals. With even the most positive countries – such as Australia – talking about a deal some years away, real questions arise about what the scope and process will be for shaping the UK’s trade with the wider world. 

Beyond the warm words, what can be done, what needs to be done, with whom and by when? 

Firstly, does the UK have to negotiate new deals or can it, as some have suggested, simply rely upon the existing agreements between the EU and a third country? For the most part, any EU trade agreement is signed between the EU and the third country. In the case of the EU, the treaty applies to the Member States of the EU. In the EU-Canada Comprehensive Economic and Trade Agreement, for example, the treaty only applies to those European states “in which the Treaty on European Union and the Treaty on the Functioning of the European Union are applied” and to those states who operate a customs union with the EU where tariffs on goods are concerned. There is certainly no presumption, therefore, that the existing EU trade agreements will continue to apply in their entirety to the UK once it leaves the EU. 

Whilst the UK remains a part of the EU it retains all the rights, but also all of the obligations and constraints, of an EU Member State. Therefore, given that the EU formally retains control over the negotiation of any trade deals with other countries until the UK finalizes its withdrawal, even starting the process of negotiating a new trade deal could put the UK in breach of its treaty obligations. Enforcing the treaties to the letter and not permitting the UK to open any discussions may not be in either side’s interest, but the possibility of such action by the EU reflects the importance of setting the right tone for the discussions and for ensuring the UK can at least continue to talk positively about the potential for future free trade agreements whilst not jeopardising the negotiations with the EU. 

In any event, a much greater impediment to a trade deal in the near future are the practical difficulties in starting any trade negotiations with a third country in earnest. 

The EU will remain by far, the UK’s largest trading partner. As such, the UK will first need to decide exactly what type of relationship it wants to have with the EU and to understand where the negotiations on the UK withdrawal and the shape of that future relationship are likely to end up. Whether the UK-EU relationship is a customs union, a free trade agreement, or a form of single market access akin to the Norwegian model will have a significant impact on the nature and scope of any deal with a third country. 

At the same time, the UK and EU will have to engage in discussions with the WTO about their respective rights, concessions and commitments - unpicking and re-establishing their collective obligations and quotas including in some potentially difficult areas such as agriculture and fisheries. Again, the outcome of these discussions could have a significant impact on any trade deal the UK looks to make with its trading partners in the future. Therefore, whilst attention has focussed on recent remarks at the G20 or the expectation of Australian trade ministers that a deal would take some years to agree, that was always to be expected as a realistic minimum timeframe. 

The UK will also require a significant increase in its pool of negotiators to have the resources to conduct those trade negotiations with third countries. Given the competence for this area has rested with the EU for the best part of a generation, there is understandably little knowledge and experience within the UK system on trade negotiations to launch any discussions – certainly insufficient to launch any meaningful discussions – in the near future. The UK will need to judge carefully whether it focuses on existing trade deals agreed by the EU as a starting point or targets those countries such as China, where no deal exists but the prize may be greater. 

Negotiating a trade deal bilaterally does, however, present some real opportunities for the UK and for those companies based in or trading with the UK. Whilst the UK will not have the 500 million consumer-base of the EU and the strong negotiating position that brings, a bilateral deal does mean that the UK can prioritise its own key sectors in any negotiation and aim to avoid some of the difficulties that arise from an EU position that has to reflect the interests of 28 different Governments. 

All in all, there is a lot of work to be done by the UK Government before the warm words about future trade deals are translated into tangible outcomes and benefits for businesses operating in or trading with the UK. Whilst future free trade agreements are some way off, it is important now to understand the range of options that face the UK and its negotiators in order to help different industries and individual businesses understand the risks and opportunities ahead and to plan accordingly. Now is also the time to seek to influence the UK Government to pursue the right policies with the right partners at a pace that best suits business’s interests. 

This is an unparalleled opportunity to help set the Government on the right course that won’t come around again for years.

Subscribe to Dechert Updates